China Loses Luster as Center for Low-Cost Production

The recent sharp rise in China's inflation rate sent a fresh wave of concern through the country's manufacturing community, because even before that, the costs of running a factory in China had been steadily increasing. The consumer price index jumped 8.7 percent in February, year on year, the biggest increase in almost 12 years. Speaking at the closing session of the National People's Congress, Premier Wen Jiabao called inflation the country's most serious problem, and admitted that the target rate of 4.8 percent for 2008 would be difficult to meet.For factory owners, inflation raises operating costs, as raw materials, transportation, energy, labor and land become more expensive. And for those owners, the timing of the inflationary surge could not have been worse. As the Chinese New Year ended, the workers returned to their jobs with more strident calls for higher wages. In China, the end of the Lunar New Year holiday is when workers negotiate and sign new one-year contracts. The rising prices of key goods--food prices rose 23 percent in February, led by pork at 63 percent--fueled a renewed urgency in the workers' demands.Wages have risen 30 percent to 40 percent for skilled workers, and almost 50 percent for unskilled workers in some areas. Because there is such great China-wide demand for low-level factory workers, unskilled laborers have received bigger increases in pay.Clearly, China is losing its luster as a location for low-cost production, as rising costs, inflation and the steady appreciation of the renminbi have increased factory operating expenses.Source: Wharton Business School, http://www.knowledgeatwharton.com.cn